Our daily roundup of retirement news your clients may be thinking about.
One way for clients to avoid or minimize their capital gains tax is to hold investments in tax-advantaged retirement accounts, such as IRAs and 401(k) plans, according to this article on Motley Fool. They may also consider owning their investments for a year or longer before selling them to get long-term capital gains tax rates, which are lower than the tax rates for short-term investments. Those who are sitting on losing stocks may want to sell these holdings and use the losses to offset taxable gains, while home sellers may want to use home improvement costs to write off capital gains from the sale.
401(k) participants are allowed to transfer their after-tax contributions to a Roth IRA, which is a better place to hold investments, as it offers tax-free growth on savings, according to this article on Forbes. Clients who have a Roth IRA can manage their taxes more effectively and shield their investments from future tax increases. A Roth IRA is also a good vehicle to build a legacy fund, as it is not subject to mandatory withdrawals unlike a traditional IRA.
Retirement investors should not wait until the tax-filing deadline this year to make IRA contributions for the past year, as this means a missed opportunity for investment growth, according to this article on Morningstar. They should also ensure that, as soon as they get the contributions in, the money is invested right away, possibly in a target-date fund, before they can find the ideal investment. IRA investors may want to keep their core portfolio simple, and choosing market equity index funds is a good strategy to achieve this purpose.
Clients are advised to find ways to reduce the amount of mandatory distributions that they have to start taking from their 401(k) and other tax-deferred retirement accounts when they reach 70 1/2, according to this article on MarketWatch. Required minimum distributions are considered taxable income, and these withdrawals can substantially drain their nest egg. The article recommends steps for clients to reduce the RMD amount and minimize its impact on their wealth.
Despite the many speculations about how the new administration will affect the stock market and retirement savings, clients should stick to their long-term retirement strategy, according to this article on Money. Investing based on the possible impact of the new administration's policies is simply engaging in a "fruitless guessing game." A better option is to build a low-cost diversified portfolio of stocks and bonds based on their time horizon and risk tolerance. However, clients should continue monitoring the markets for major policy changes so they can make the appropriate adjustments to their retirement plan if necessary.
